Trade gap shrinks significantly
Pakistan’s trade deficit shrank nearly half in July 2022 to just $2.6 billion – the lowest gap in the past one and a half year – after the government’s clampdown on the outflow of dollars paid as dividends and the country saw over $3 billion reduction in import bill.
The steep reduction in imports in July compared to the preceding month should be a sigh of relief for the policymakers, who have been struggling on the one hand to calm down markets and on the other hand dealing with the International Monetary Fund (IMF), which is increasingly getting tough on Pakistan.
The trade deficit came in at $2.64 billion in July, down by 47%, or $2.32 billion, on a month-onmonth basis, reported the Pakistan Bureau of Statistics (PBS) on Tuesday. On a month-on-month basis, exports fell by onefourth to $2.2 billion in July 2022 over the preceding month, showing a dip of $700 million. The steep reduction in exports should be a concern for the Ministry of Commerce. But imports too decreased by 38%, or $3 billion, over the previous month.
The import bill in July stood at less than $4.9 billion, in line with expectations of the federal government. The federal government and the State Bank of Pakistan (SBP) have taken administrative measures to clamp down on imports. The federal government’s import ban has largely proved ineffective but the SBP’s vetting of almost every letter of credit, introduction of import quotas and even restricting imports through open accounts have helped to slash the import bill.
The decision to increase petroleum product prices also helped to reduce consumption and the import bill. The $3 billion reduction in imports in just one month should soothe the nerves of markets that are panicked due to delay in revival of the IMF loan programme despite Pakistan taking all the prior actions. This is the lowest trade deficit in the past one and a half year.
Last time, the country had booked $2.7 billion trade deficit in January 2021. If Pakistan has the ability to get cheaper energy from Iran or from Russia, it could have been sufficient to bridge the trade deficit, according to the KASB KTrade Research. But securing supplies from those countries could have had much punitive geo-economics implications and might not be a viable strategy, it added.
For current fiscal year 2022-23, the government has set the trade deficit target at $27.8 billion, which requires a reduction of 42% against last year’s deficit. The import target for the new fiscal year is $65.6 billion that will require 22% reduction in the import bill. Pakistan’s trade deficit had increased at an unsustainable pace of over 55% and skyrocketed to a record $48.3 billion in the last fiscal year due to an unmanageable increase in imports that beat all official estimates despite a temporary ban on certain goods.
The higher trade deficit took a heavy toll on the foreign exchange reserves that had dropped 57% from their peak of $20 billion in August last year to $8.6 billion as of last week. The government’s trade policies have been influenced by a few handpicked exporters, who put pressure to take monetary benefits, keep the export base narrow and restricted to a few sectors. Last week, the federal government cleared Rs155 billion in a subsidy package for the exporters, despite allocation of only Rs60 billion in the budget.
On a year-on-year basis, exports showed a contraction of 5.2% in July and stood at $2.2 billion against $2.34 billion in the same month of previous year, according to the PBS. In absolute terms, there was a reduction of $121 million in exports. In July, the imports were lower by $714 million, or 13%, compared to the same month a year ago, according to the PBS. Consequently, the trade deficit narrowed down by 18.3% year-on-year to $2.64 billion in July, a reduction of $593 million, according to the national data collecting agency.